Some Solid Evidence that a strong Values Orientation pays off
Values produce Value |
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Values and Performance
from “Leading Corporate Citizens” - by Sandra Waddock
Extracted from chapter 6: Value Added – The Impact of Vision and Values:
There is a long-standing debate among scholars on whether it pays to be responsible. There is mounting evidence that this relationship is a positive one, but it is clear that leading corporate citizens and their leaders have a fundamental choice to make.
In Built to Last the visionary companies quoted by Collins and Porras markedly outperform the comparison companies. Guided by their core ideology and meaningful sense of purpose, these companies display remarkable resiliency. “ Visionary companies attain extraordinary long term performance. Suppose you made equal investments in a general market stock fund, a comparison company stock fund, and a visionary company stock fund on January 1st 1926. If you reinvested all dividends and made appropriate adjustments for when the companies became available on the stock exchange, your $1 in the general market fund would have grown to $415 on Dec 31st 1990. But your $1 in the visionary companies stock fund would have grown to $6,356- over six times the comparison fund and over 15 times the general market.” Also in Built to last, “Contrary to business school doctrine, maximizing shareholder wealth or “profit maximization” has not been the dominant driving force or primary objective through the history of the visionary companies. Visionary companies pursue a cluster of objectives, of which making money is only one-and not necessarily the primary one. Yes, they seek profits, but they’re equally guided by core ideology-core values and a sense of purpose beyond just making money. Yet, paradoxically, the visionary companies make more money than the purely profit-driven comparison companies.”
Also, Sandra Waddock’s research with her colleague Sam Graves shows that visionary companies outperform non-visionary ones in practices they have evolved in their relationships with their stakeholders. They treat their primary stakeholders better. This research strongly supports the idea that by living out values through constructive operating practices and positive stakeholder relations, companies also do well for their owners financially over the long term.
The research also indicates similar tendencies for employee relations. Jeffrey Pfeffer and John Veiga summarized a good deal of research on the relationship between firm economic performance and employee relations. “According to an award-winning study of the high performance work practices of 986 firms representing all major industries, a one standard deviation increase in use of such practices is associated with a 7% decrease in turnover and, on a per employee basis, $27,000 more in sales, $18,000 more in market value, and $3,800 more in profit. A subsequent study conducted in 1996 found even larger economic benefits. A one standard deviation improvement in the human resources system was associated with an increase in shareholder wealth of $41,000 per employee – about a 14% market value premium.” Pfeffer and Vega concluded that “Simply put, people work harder because of the increased involvement and commitment that comes from having more control and say in their work; people work smarter because they are encouraged to build skills and competence; and people work more responsibly because more responsibility is paced in hands of employees farther down the organization.”
“Unlike the toothless vision and mission statements of the last decade, a clear identification of a company’s corporate values can determine strategy, foster community, provide cultural continuity, facilitate corporate transformation, and assist in crisis management.
Values are in tune with the new business environment, where passion and energy are seen as a source of competitive advantage. Values may be popular with up-and coming companies, but they are not a new idea. The fact is that they have been a staple of successful organizations for decades. A set of core values underpins many of the most famous and long-lived companies. Such companies often place their values above profit maximization, yet research suggests that they outperform companies that put profits first.
Values seem to offer a handle on changes taking place to the relationship between individuals and organizations and the need to create a new framework for the future based on mutual self-interest. Values can help build a bridge between a company and its employees. In their book The leadership Challenge, Barry Posner and Jim Kouzes assert that shared values: Foster Strong Feelings of Effectiveness, Promote high levels of company loyalty, facilitate consensus about key company goals, encourage ethical behavior, promote strong working norms, reduce levels of job stress and tension, foster pride in the company, facilitate understanding about job expectations. Foster teamwork and esprit de corps.
Many of those Dearlove and Coomber spoke to, including a number of CEO’s pointed to clear business benefits, even though they were unable to quantify the effect. Evidence does exist, however, to support this assertion. A four-year study of between 9 and 10 firms in each of 20 industries carried out by Professor John Kotter of Harvard Business School and his colleague John Heskett, found that firms with a strong culture based on a foundation of shared values outperformed the other firms in the study by a significant margin. Their revenue grew more than 4 times faster, their rate of job creation was 7 times higher, their stock price grew 12 times faster, and their profit performance was 750 percent higher.
The identification of an organization’s core values is a task not to be undertaken lightly. If values are to be effective, this cannot be a superficial exercise. They cannot be plucked from thin air. The key is to capture what is authentically believed, not what other companies select as their values or what the outside world thinks should be the values.
Charles Handy notes in The hungry Spirit “It is inadequate to borrow beliefs. We have to work them out for ourselves.” If a company comes under pressure for whatever reason, its guiding principles will only help if they are true for that company.
It is difficult, if not impossible-to prove a direct link, but values driven businesses appear to enjoy a number of important advantages over other organizations in a number of areas including: Staff recruitment retention and development, motivation and achieving alignment between organizational and individual goals, change management, crisis management.
In employee recruitment and retention: values have 2 critical roles: first, a company that articulates its values enables potential recruit to apply a degree of self-selection. Values also provide a framework to match individual career goals with the organization’s objectives. Organizations with strong employer brands are increasingly attractive. A company with a clear set of values offers employees a chance to work with the company for something they both believe in. Values offer a foundation upon which employee loyalty and trust can be built. If employees identify with the values of a company, they are more likely to trust the organization-and to give their active commitment to its objectives. Frederick Reichfield, through his research, estimates that disloyalty from stakeholders-employers, shareholders, staff, and customers-can cut performance and productivity by 50%.
In engaging staff commitment: London Business School’s professor Sumantra Ghoshal has noted that human capital is now the primary source of sustainable competitive advantage. Companies will have to find ways to mobilize active commitment-rather than passive acceptance-of their people. An organization that links strategic and operational objectives to explicit values – and translates that link to the everyday work of employees-will enjoy greater commitment. But there is another more important aspect to this issue. Much of the last decade has been spent trying to create empowered workforces. There is ample evidence to indicate many empowerment initiatives have failed. AZ major factor, we suggest, is because management hierarchies have been removed for the sake of expediency without providing a meaningful framework for the individual decision-making. Values may fill this void. They offer a compass always pointing true north.
As a decision-making framework: The companies we point to also confirmed that empowerment is a key benefit of introducing explicit value statements. A number of comments from interviewees support the notion that values can create a framework for discretionary decision-making. Karen Nichol, global HR Director for sales and marketing at Silicon Graphics, which had recently introduced a major values program says” The values and expected behaviors we have articulated for each value can be a tremendous in helping and individual sorting through these issues. They can help guide decision making and can make the individual more independent in solving problems.” They provide people with the context to make good decisions.
In change management: Values can support change management in two ways, by:
In times of organizational crisis: A clearly articulated set of values appears to offer a touchstone at difficult points in the life of an organization. Values act as a guide here, helping companies preserve their identity and integrity in extremis. Examples of this are Johnson and Johnson, and Levi Strauss, quotes on pages 16 and 17.
Rose Ann Stevenson, an HR manager at Boeing, analyzed values from 77 different companies. She found 19 commonly identified values. Although no one value appeared on all 77, the most commonly mentioned were integrity, involvement, achievement, quality creativity/innovation, respect; earning, fairness, customer service. Despite finding 19 common values, she observed little agreement on the meaning of these values. For the value of integrity, there were no fewer than 185 different interpretations. It is the interpretation-and most particularly the translation of values into individual actions or behaviors-that is the critical element.
A mere 29% of the US working population is engaged. 55% is disengaged, and 16% is actively disengaged.
You can divide any working population into three categories: people who are engaged (loyal and productive), those who are not engaged (just putting in time), and those who are actively disengaged (unhappy and spreading their discontent). The U.S. working population is 26% engaged, 55% not engaged, and 19% actively disengaged.
In essence, then, the CEO's job is to improve the ratio of engaged to actively disengaged workers. But here's the problem: Few of the CEOs in our study could say which work units in their company were effectively engaged and which weren't. They didn't know where their culture was strong and where it was weak, whether it was getting better or getting worse. Source:
Gallup Management Journal – Winter 2001 – On a mission
When an individual feels that his or her job is an expression of the corporate values and purpose, the result is a boost in morale and performance. According to Gallup Surveys, one of the most important factors that directly impacts corporate productivity and profitability is whether employees feel that the mission (core values and purpose) of their company makes them feel like their job is important, and is an expression of these values and purpose. According to Gallup research, “High scores on the Q-12 mission question correlate positively to all business outcomes, but especially to productivity and profitability.” That’s because employees who share a mission tend to be engaged, and the more engaged employees there are in the company, the better the bottom line. A clear sense of mission also appears to enhance employee loyalty and pride. Low scores on the mission question are difficult to improve. That’s because the ability to connect one’s job to a larger mission is not primarily a matter of competence, work ethic or other such traits that good workers naturally possess. Instead, the job-mission connection comes about through communication that starts at the executive level and resonates throughout the ranks. For effective communication to occur, top management must first believe in the mission, a process that requires consensus and clarity. That, Gallup has found, occurs when companies include workers from throughout the company in their mission development committees. The best statements are “short, direct, and set a value system.”
The single most important variable in employee productivity and loyalty is the quality of the relationship between employees and their direct supervisor. What they want is someone who sets clear and consistent expectations, cares for them, values their unique qualities, and encourages and supports their growth and development. Put another way, the greatest sources of satisfaction in the workplace are internal and emotional.
Employees who answered, “strongly agree” to the Q12 questions were 50% more likely to work in business units with lower employee turnover, 38% more likely to work in more-productive business units, and 56% more likely to work in business units with higher customer loyalty. The 12 questions address the most desirable emotional outcomes for people, not step-by –step guides to getting them. (Each talented manager uses his or her own style.)
Investors Business Daily – March 2002 – Even in downturn, employee morale stays high at some firms.
Times are tough. Companies are freezing salaries, slashing jobs and cutting corners. Employee morale at many places is falling into the dumper as a result. But some companies have escaped that fallout, even if they’ve dome just as much cutting. High morale depends on how well companies treat their people. It also helps if companies have some sort of mission statement. When things get difficult, people have to remember why they do this. Companies shouldn’t panic and make moves to prop up morale when things turn sour. Better to keep morale high through good and bad. Respect for the individual is more important than pay. Communication is another key. Tell employees what’s going on, and they’ll appreciate it and feel better. Empowering employees is important. Having them share in responsibility. The biggest mistake companies can make is to take a short-term perspective. That may work with finances, but people are different.
BusinessWeek –Practice what you preach – Nov-2-2001
Practice what you preach-What managers do to create a high-achievement culture. Book by David H. Maister.
Survey of 139 offices of 29 firms in 15 countries in 15 different lines of business:
The most financially successful businesses do better than the rest on virtually every aspect of employee attitudes.
Employees as brand builders
[By William J. McEwen, PhD] Gallup Management Journal
For many years, marketing students have been thoroughly trained in the traditional tools of brand management: the famed "four P's." As a result, marketing practitioners, just like marketing professors, have focused on managing their businesses through the conscientious application of this well-established set of tools. Their goals: to provide a great product, smartly (and often heavily) promoted, intelligently placed and competitively priced.
What is the key to business growth, in the eyes of traditional marketers? Managing and --as necessary -- trading off between these same four P's, so that your brand outperforms its competitors.
The four P's have certainly served management well. Until the 1980's, that is.
As a myriad of marketing cases can attest, these four marketing tools have been powerful drivers of product sales. Bear in mind, however, that these sales results were achieved in an expanding consumer economy, where customer acquisition was the goal, and customer retention was largely assured through product quality control. The marketer was king, and there were four powerful knights to do the king's bidding.
Meanwhile, however, the world changed. Dramatically. We moved from a product economy to a service economy, where marketers who had sold instant coffee and facial tissues were now challenged to sell airline travel, investment accounts, long distance telephone services and fast food.
In addition, we moved from an expanding consumer economy to a mature one, where increased brand volume could only be met through increased brand share, and competition was greatly intensified. At the same time, marketers began to recognize a very powerful fact: Customer retention is typically far more profitable than customer acquisition.
For service marketers (or for those who have service as a major component of the service/product mix they offer), who now must focus on building an enduring brand relationship (i.e., "loyalty"), the question for this new marketing environment becomes, "How can we optimize the use of these four P's?"
The answer? They can't!
Why not? Because there are five P's, not four! And the power of the fifth P is so dominant that it often overshadows any of the other four when it comes to building a Brand relationship.
What is the fifth P? People. People represent the Brand and people, on behalf of the Brand, touch the customer in any number of ways. These individuals, often called "customer facing employees," may well be the most powerful marketing resource available to build brand differentiation and enhance customer commitment.
Employees may not be thought of -- or managed -- as though they represent a "marketing" resource. Nonetheless, they very clearly are. And a recent Gallup research and development effort dramatically underscores this simple, yet powerful, marketing truth.
Employees as brand builders
In a study of more than 6,000 consumers, Gallup undertook the task of determining the relative role of each of the five P's in building Brand loyalty.
We looked at a wide range of product/service marketing categories - automobiles and fast food, retail electronics and airlines, and banking and long distance telephone service. All represent highly competitive categories, with any number of powerful leading brands aggressively employing various combinations of the four traditional tools of brand marketing. A few -- a rather obvious few -- have also been paying attention to the fifth P.
We asked each brand's customers to tell us which brand's advertising stands out, and had them rate the product/service quality, the price/value, the locational convenience, and the persuasiveness of the advertising for a number of leading brands that compete in the same category. We had them indicate which brand they plan to buy next, and what other brands they might consider. And, to address the fifth P, we asked which brand's employees stand out, and then had customers rate the helpfulness and competence of the people who represent the brand and with whom they may have had contact.
What did we learn? Some things that will surprise many marketers -- and which should also make many of them rethink their current marketing emphasis.
In a crowded category, in which parity is the rule, is location key? Is price?
For marketers of fast food, it is not location, or price, or even product quality that makes customers want to return. What is it? Well, if you are marketing hamburgers, the most powerful driver of intended repeat visits is actually your employee.
Product quality, surprisingly, is not what brings fast food customers back. Instead, product quality functions mainly as a "dissatisfier." Poor product quality turns customers into non-customers, but great product quality is largely assumed.
Does price/value keep these burger-buyers loyal? Given the enormous price competition in the fast food category, you might think so. However, outstanding employees are at least three times as powerful as outstanding price/value when it comes to motivating return visits. Outstanding employees are also at least four times more powerful than a convenient location, and three times more powerful than food quality and taste appeal.
OK, so employees are a major key to customer commitment in the low involvement, impulse-driven world of fast food. What about categories where there is far greater involvement in the decision, and where there appear to be some far more important product considerations? Surely, that's where the role of the product must emerge?
Consider one such category: the case of the automobile marketer - where product contact occurs daily and employee (dealer rep) contacts, in contrast, are often few and far between.
Contrary to what would be expected or what syndicated product quality ratings might suggest, for many automobile brands, product quality perceptions don't really enter in as a significant factor driving repurchase intentions. In addition, locational convenience is almost never a key issue.
What is important? Perceived value is an important consideration for many auto brands. Customers who rate their vehicles as a great value for the money are two to three times more likely to choose that vehicle again. Advertising is often an important factor, as has sometimes been conjectured, as it serves to reinforce the wisdom of their current brand investment both to the owners and to their friends.
However, the number one motivator of continued commitment - for automobiles, just as for fast food - is not the product, nor the price, but the people. The dealer representatives with whom auto owners have sales and service contact are anywhere from two to five times as powerful as any other "P" in cementing an ongoing relationship with an automobile maker. Customers who feel the dealer representatives for their vehicle stand out from all others are from 10 to 15 times more likely to choose that same make of vehicle for their next purchase.
What does this research imply for a marketing organization? Does it say that product quality is irrelevant? Hardly. Does it say that perceived value has no place in creating loyalty? No. Does it suggest that locational convenience is not a factor in consumer retention - or that the only things that matter are the people who provide the service or make the sale? No.
What it does state, quite powerfully, is that there are an array of marketing tools that any company can use when attempting to build a brand relationship. And, for each of those tools, the key for any brand is to differentiate itself meaningfully from its competitors. Differentiation is, after all, the essence of branding.
Can a company differentiate itself based on product attributes and product quality? Perhaps, although usually not for long. Most product differentiation, to the extent that it exists, is limited to differentiation based on features or attributes. These can be copied, or they may have a tenuous or indirect relationship to the benefits that consumers deem important. Does flame broiling translate into a better-tasting burger? Does a side-impact bar or a Northstar system mean better performance or greater customer satisfaction? Perhaps.
It is, however, up to the customer to assign meaning or value to these items. And, often, the customer may perceive that there is some difference … but yet may not conclude that the brand offers a meaningful difference.
In so many categories, including the six that we studied in this recent R&D effort, the marketing tools used by brands in attempting to differentiate their offerings have simply not created consumer-perceived differentiation. Product quality is felt by consumers to be essentially the same - at least among an array of leading brand alternatives. Pricing is similar. Availability and accessibility are similar.
So, where do brands typically turn in order to create a perception of differentiation? To their advertising, of course. Advertising is a readily controlled tool for delivering a consistent brand message, and for registering a differentiated brand promise.
Terrific. Except for the fact that advertising, while readily controlled, is not the key to enduring brand loyalty. A far more important factor is that which is far less readily controlled, but far more meaningful to the average customer: people.
Why is so little attention paid to this key brand loyalty-enhancing factor?
First, most companies don't think of their employees as a marketing resource. They don't envision, recruit or manage them as though they were components of their brand marketing efforts. That's a mistake. Employees, whether recognized or not, are brand builders (or, at times, destroyers).
Second, and not incidentally, it is far more difficult to establish a consistent employee-driven experience than a consistent advertising-driven experience. Employees are simply far more difficult to control than pricing or promotions or even product quality - and that's critically important when setting out to assure a consistent customer experience. Customer-facing employees are by far the most difficult customer touch-point to manage to assure consistency of experience.
That does not mean that these employees cannot, or do not, determine the degree of customer commitment. In fact, it's because this difficult-to-manage resource isn't an easy solution that it has proven to be such a powerful one for companies ranging from McDonald's to Southwest Airlines.
What do people represent? They are a differentiating factor (in fact, a very powerful one) that cannot be readily duplicated by the competition. And that, after all, is the Holy Grail of relationship marketing - a meaningful brand differentiator that is sustainable in the face of competition.
Want real growth? Measure the right things [ BY William J. McEwen ] Gallup Management Journal
Understandably much has been made of the Enron debacle. A major energy company, once trumpeted as a Wall Street darling, melted into bankruptcy court. And not just any company, but the seventh largest in the nation in revenue -- and a company heralded by Fortune as "most innovative" not once, but six years in a row. What had been a beacon of business success and leadership became, almost overnight, a poster child for alleged fraud, greed, and gross mismanagement.
As a result, people are pointing fingers. They're pointing at regulators and politicians entrusted with performance oversight. They're pointing at company leaders and at all those who somehow failed to notice or assess the problems of an over-extended company with an allegedly "failed business model." People are also raising questions about the wisdom of having consulting organizations report on the success of their own recommendations.
These are important questions. But are they the right ones?
How can economic disasters such as the Enron collapse be avoided? How can investors protect their investments?
Is the solution a closer watch on each company's complex web of "secret" partnerships, subsidiaries, and accounting manipulations? Or is the problem deeper than that? Are companies plunging headlong down a path, guided only by a compass that cannot reflect their actual direction? Does the compass need to be more finely tuned, or is the problem that companies are using a compass that points inexorably in the wrong direction, and always will?
Risky business:
There is a core problem revealed here, and it reflects the attitudes and values of Wall Street analysts. Companies such as Enron are regularly praised for their apparent revenue growth. Bigger is always better. Stock prices and "buy" recommendations directly reflect a company's track record in reported income and profits. Thus, companies urgently need to show analysts and investors a continually increasing stream of cash.
If revenue and earnings are the principal metrics by which analysts and investors evaluate corporate performance, it's a small wonder that companies might succumb to the pressure to report or restate profits in what seems the most favorable way. This singularly focused pursuit of revenue can lead companies to all manner of creative accounting practices when reporting business performance. For Enron, it certainly did. And Enron is not alone.
Company leaders will aggressively pursue the outcomes praised by those whose actions and recommendations influence their company's measured value. That's what they're paid to do. Build the worth of the company, in line with the accepted metric that indicates its worth. If the critical outcome is growth, then company leaders will focus on growth. And at least for some, this focus can lead to the pursuit of growth by any means.
Is this really necessary? Is it even desirable? As Milton Friedman put it, "We don't have a desperate need to grow. We have a desperate desire to grow." There's an important difference.
Is growth in earnings per share a reliable indicator of a company's health? Enron provides an answer to that: not always. Growth is important, but reported revenue growth may not reliably indicate the success of a company's business model. Reported growth, it appears, can be creatively enhanced.
If it's not growth in income or reported profits, then what is a reliable indicator of the health of a company? What measurement should analysts and investors focus on when they make their investment decisions?
Measures that matter
Ultimately, the true health of any company is not reflected in its reported revenue growth, but in the health of its customer relationships. Healthy customer relationships assure long-term growth. Real growth. Acquiring new customers is important. Revenue growth is important. Keeping customers and assuring future growth is even more important.
Companies that seek to monitor the health of their customer relationships need a different yardstick. Management requires measurement. And if there is to be meaningful oversight, analysts and accountants will require that same sort of yardstick.
In short, companies need a reliable and objective means to assess the real strength of their customer connections. The Gallup Organization has pioneered just such a metric, and in light of recent events, it could not be more timely.
Importantly, CE11, a metric that reflects the strength of a company's customer relationships, is not artificially inflated by secret partnerships, overstated earnings, questionable mergers, or dubious brand or line extensions. Rather, it measures what is critical to the ongoing success of any company's business model: the degree to which a company creates, enhances, and protects its customer relationship assets.
How do we avoid future Enrons? How do we redirect the attention of company leaders and investment analysts to that which truly matters -- and away from what Jack Trout has termed a "greenhouse for trouble"?
We need this new customer metric and what it implies: a new and meaningful focus. We need a new compass, one that can guide companies and Wall Street -- and those who invest their 401(k) earnings -- on the real path to enduring business performance.
Customer engagement represents an important challenge and a critical opportunity for companies to redirect their measurement toward outcomes that count. This new metric gives company leaders and industry analysts the means to recalibrate their corporate compass.
Analysts need no longer look just at the stated profits and cash flow reported in a company's current balance sheet. They should be demanding, and carefully monitoring, solid evidence regarding a company's connections with its customers. The time has come.